On the Sound Financial Valuation of Flexibility in Information Systems

Abstract

Flexibility often represents the key area of value added by investing into an information system (IS) but also carries significant costs. Therefore, its quantitative financial valuation is of vital importance to make economically informed decisions about flexibility. This is challenging due to varying flexibility definitions and the complexity of the flexibility construct in itself. To address this challenge, this paper analyzes the scientific literature concerned with the financial valuation of flexibility in information systems (FIS). In the first part, it introduces fundamental requirements for a proper financial valuation, discusses the characteristics of FIS that are driving its economic value and identifies suitable financial valuation approaches. In the second part, a structured review of literature focusing on the application of FIS valuation analyzes to what extend the existing literature supports economically informed decisions within flexibility design. Further research is indicated with regard to dependencies between flexibility and the existing IS landscape as well as to a more structured and comprehensive approach to examine all interacting features of an IS enabling flexibility in the first place. In summary, joining the theoretical basis and the application of FIS valuation, this paper gathers all necessary fundamentals for a sound financial valuation of FIS and reveals the need for further development within this stream of BISE research.